Avoid startup mistakes in money management & financial planning


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We had Jacques Lapointe of AVAC discuss how to avoid "re-running" the same mistakes that commonly plague startups in Alberta for AcceleratorYYC's March 1 hr Lunch & Learn (slides & audio below).

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Avoid startup mistakes in money management & financial planning

  2. 2. Today’s Topic  Alberta start-up landscape  AVAC has 1000’s of AB companies  AVAC portfolio of 50+ companies  Hands-on experience working with the Founders of early stage cos.  Start-up stage  scaling operating  growth  exit.  Seen issues from:  Fund Raising  Cash Management  Financial Planning  Exit  Etc.  Lots of common patterns  Lots of common mistakes  Avoidable “Re-run Movies”  Avoidable mistakes 2 BACKGROUND About Me  6+ years at AVAC  Lead/co-lead $19 Mil Investment  12 investee companies  Portfolio has raised over $55 Mil in equity and debt.  Board Participant/Advisor for Portfolio  15+ years Prior to AVAC  Product Management, Marketing, Business Dev., Operations and Technical experience (Public/Private Co.s)  NA and International experience  Lead investigation for acquisition  Helped grow revenue $0.5-$14MM  4 awarded patents  MBA, P.Eng.
  3. 3.  Every company and every situation is unique!!  Some themes / recommendations in this presentation may apply more to some businesses versus others.  There’s always more to the issue than we can discuss!! Some simplification here!  Focus is on early stage companies.  While not obvious, the Focus here is on the Financial Impact.  This is an Alberta Story!!!!!!! Based on real examples. Let’s have some discussion 3 REALITY / DISCLAIMER
  4. 4. Background  Founders start a business with a product or service idea.  Eventually need money beyond Friends & Family. 4 THE INVESTOR PERSPECTIVE  Management?  Team  Model  Business Model  Market?  Opportunity  Money?  Financing  Magic?  Product/Service/Tech/IP?  Momentum?  Market Traction
  5. 5. Mistake / Issue  Many companies BLOW their investment opportunity!  Wait too long to engage investors  Mindset is “Build it and investors will come!”  Many companies have ONLY a basic understanding of the investor’s perspective (now popularized by TV’s Dragons & Sharks)  Founders consume cycles “learning” while raising money  What an investor is looking for?  Why they invest?  What types of companies?  What stage of progress do they invest?  Investment approach / structure / timing of cash?  How the investor makes money? 5 THE INVESTOR PERSPECTIVE
  6. 6. Recommendation  Talk to as many investors, advisors, etc. at conception and through out the building of your company.  Defining your business  Structuring your business  Business model / pricing model / etc.  Accessing grants and other sources of funding  Before you need to raise money!!  Engage with Start-up groups, Innovate Calgary, TecEdm, etc.  Engage before you need to raise money!! 6 THE INVESTOR PERSPECTIVE
  7. 7. Background  Historical fund raising results in growing valuation (Alberta).  Company progress “deserves” higher share price (valuation)  Successive raises take place over time:  Founders, Friends/Family, Connections, Angel Rounds, etc., etc. 7 VALUATION GAP Founders Friends/Family High Net Worth Individuals 1 Other Connections Angel Round High Net Worth Individuals 2 Concept Prototype V1, V2, V3 Strategic Industry Partner Media Coverage V4, V5, V6 Customer Discussions
  8. 8. Mistake / Issue  Valuation has grown ahead of:  “REAL” revenue  “REAL” commercial progress.  Ahead of other “REAL” valuation metrics.  Becomes very difficult to finance further growth  Valuation has grown unattractive to new investors.  Unsupportable valuation  Revenue?  Return of Investment?  Market traction?  Views/Visits/Downloads?  Comparable Companies? 8 VALUATION GAP
  9. 9. Recommendation  Raise valuation in small increments  Focus on key valuation metrics.  Don’t fall in love with your “development” progress  Don’t drink too much of the Company Koolaid  Keep your valuation attractive for future investment.  YOU WILL NEED TO RAISE MORE MONEY!  Seek advice from investors  Understand what investors are looking for!  Avoid the down round! 9 VALUATION GAP Down Round!!
  10. 10. Background  Typically companies raise “enough” money  i.e. based on estimated costs to grow beyond cashflow breakeven (to be self-sustaining).  Or finance certain stages of development  Beta Trial / Prototype  Proof of concept  Product ready for market  Reach Initial sales 10 RAISE MORE MONEY? Proof of concept Worked = Continue Issues = Pivot Failed = Stop / Quit
  11. 11. Mistake / Issue  Companies don’t raise enough money when they can  95.5% of all early stage companies need more money  And on several occasions  Typically and unfortunately progress takes longer than everyone thinks / hopes.  Raising money gets harder especially when things don’t go exactly as planned (i.e. takes longer).  Companies don’t raise enough - Dilution and Valuation tend to be considered versus long term objectives and survival. 11 RAISE MORE MONEY? Proof of concept Worked = Continue Issues = Pivot Failed = Stop / Quit
  12. 12. Recommendation  Take the money while you can.  While there’s interest / excitement!  Expand your Use of Proceeds if needed  Realistically budget more than you think you’ll need.  Add more money to each budget item and consider new items  You can always cut back/re-budget/redefine later (things will change)  Don’t be afraid of dilution 12 RAISE MORE MONEY?
  13. 13. Background  For all the “right” reasons and “good” intentions:  Founders and/or Shareholders loan money to the company.  Convertible debt is used for financing from some angels / investors  Accounts Payable Grows because contractors agree to be paid later for work undertaken:  Legal Firm Patent work $25-50K  S/W development $50-100-200K  Start up loans are utilized i.e. BDC.  All necessary financing steps at the time. 13 DEBT TRAP
  14. 14. Issue  When trying to raise money again, Financers can be scared away when they see the level of debt on the books  Why invest $500K when there’s $350K in debt? Due Diligence stops! Investor concerned that money will pay debt and not advance company  Your financials don’t always explain your plan to address debt:  i.e. SRED will repay Founders/Shareholders  i.e. Convertible debt is planned for equity conversion in Q4, etc. 14 DEBT TRAP
  15. 15. Recommendation  Carefully plan debt accumulation versus equity or other sources of financing. Don’t be afraid of dilution.  Convert loans to equity ahead of fund raising (or at least get additional notes to the financials such that investors can understand the repayment plans so their capital is not at risk)  Convert Accounts Payable to manageable, structured long term debt. 15 DEBT TRAP
  16. 16. Background  Start-up builds business and gains traction  Hires a “marquee” or “proven” individual at substantial salary / options / etc. Issue  After 8-10 months it is not working  Company is faced with:  Lost productivity / progress  Severance  Options at issue  Time consuming resolution  Money spent  “Community” wondering what happening (NOISE) 16 HIRING KEY PERSONNEL
  17. 17. Recommendation  Company and the Marquee individual need to define deliverables to:  Align expectations with company vision/strategy  Provide tangible attributes for separation  Ensure start-up oriented employment agreement  If the “marquee” individual is looking for big severance that should be a Red Flag.  Options to be earned with progress or granted over time 17 HIRING KEY PERSONNEL
  18. 18. Background  Many early stage company Boards are formed with Investors  This is not surprising:  They believe in you! They may know you (family / friends)  They like your market, your idea, your vision, etc.  They join your Board because they can bring value:  Experience that you can leverage.  Invested in other companies.  Board experience.  Venture Capitalists  Genuine interest = Investor 18 BOARD DEVELOPMENT
  19. 19. Issue  Board members are conflicted (Typically major shareholders)  First and primary obligation of the Board is to the company.  WRT Financing: Too often the Board discussion is shareholder based (about dilution versus adequate funding to achieve strategic plan).  Companies can be hampered with raising too little or too high a valuation 19 BOARD DEVELOPMENT It’s settled. We’ll raise money at double the valuation!
  20. 20. Recommendation  Try to recruit independent Board members that can still add value to your business  Learn about Board roles, guidelines, competencies, etc. 20 BOARD DEVELOPMENT
  21. 21. Background  Founders start a business with mutual intentions  Sometimes friends, relatives or spouses  Split ownership equally, invested equally at start  One decides to leave business but retains ownership share 21 THE PARTNERSHIP
  22. 22. Mistake / Issue  An inappropriate structure was established for separation  One founder still has a major influence (shareholder) on the company but is not involved.  Large voting block of shares remains with former founder  Significant company development still to go  Interests no longer align  Strategic direction, financial decisions, etc. at odds  $$$$ 22 THE PARTNERSHIP
  23. 23. Recommendation  Consider potential outcomes of your partnership.  Develop structure whereby partners/founders can exit Amicably in the current and future stages of the company  Some kind of staged approach?  Seek legal counsel 23 THE PARTNERSHIP
  24. 24. Background  Company has established itself “in-market” and is progressing  Decides its time to exit 24 PREPARING FOR AN EXIT
  25. 25. Mistakes / Issues  Fact: Most companies that try to sell don’t get acquired.  Companies hire an M&A (merger acquisition firm) that is referred to them.  Few analyze and evaluate firms  Company has not thought through an Exit  “Build it and they will come”  Company has not properly prepared itself for an Exit and has to start  Financial reporting  Company Structure i.e. Equity & Debt status, Board of Directors, etc.  Evidence of progress (the “data room”)  Sales pipeline, material agreements, employee agreements, etc.  IP agreements, IP / Patent applications  Valuation expectations  What are acquirers looking for? Revenue? Strategic? IP? Team?  Could be big financial mistake. Recommendation  Consider the exit path throughout your journey.  Always keep an eye on the exit strategy and what is required  Talk to advisors. Get to know an M&A specialist/advisor. 25 PREPARING FOR AN EXIT
  26. 26. Mistakes / Issues  Not hearing what the investor is asking for – not answering the question  Not giving the investor what they requested  Financial statements, Cashflow, A/R, A/P, Competitive Landscape  Giving the investor something they didn’t ask for  Misguided expectations  All the money upfront  Investment is in the bag Turn-offs  Slow / No responses to questions and due diligence  Selective answers to due diligence  Aggressive / pushy / want fast response  Big time gaps  disappear for a month then asks what is the status  “I think you have everything you need”  telling the investor  No shows by team members invited to Due Diligence meetings  I just need $100K and everything will be fantastic  not thought through  Distrust / lack of report  Ungracious or inappropriate responses to a decline 26 INVESTOR DISCONNECTS / TURNOFFS
  27. 27. Recommendation  Think like the investor  Get to know the investor  Understand the investor perspective 27 INVESTOR DISCONNECTS / TURNOFFS
  28. 28. 28 START UP
  29. 29. 3/27/2014 29